Paying The Price For Our Faustian Bargain With China

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Faustian bargain, a pact whereby a person trades something of supreme moral or spiritual importance, such as personal values or the soul, for some worldly or material benefit, such as knowledge, power, or riches.”

Roughly forty years ago we and the Chinese entered into a true Faustian bargain.  We agreed to open our markets to Chinese goods, and the Chinese in exchange opened their nation to foreign investment and manufacturing. We were motivated by greed.  Factories in China would have access to seemingly unlimited quantities of low cost workers.  It did not hurt that those factories would be unencumbered by unions, workplace safety laws or environmental regulations.

The Chinese were motivated by a desire to survive.  The Soviet Union was tottering toward extinction, destroyed not by American forces on the battlefield but by rot and inefficiency in its economy.  The Chinese would escape that fate by giving their people a higher standard of living and a more comfortable lifestyle in exchange for the continued acceptance of an oppressive, totalitarian regime.

The bargain was made.  As with all pacts with the devil the bill has come due, this time in the form of the coronavirus.

Well over two months ago the coronavirus began to explode in China.  The Chinese government did what it always does.  It lied.  It covered up the truth.  It attacked those who claimed there was a serious problem and accused them of spreading disinformation and propaganda.  On the internet, the Chinese deployed an army of bots, similar to those it used to bury the truth about protests in Hong Kong last year.

The Chinese had no choice.  The continued existence of the Chinese Communist Party’s dictatorship is predicated on perpetual, explosive growth.  Acknowledging the scope of what was happening would bring down the house of cards that had taken so long to construct.

Western observers, leaders and businessmen followed suit.  They too believed they had no choice.  They had bet everything on a system that made the entire global economy dependent on supply chains that seemingly all ran through mainland China.  Contemplating what would happen if those supply chains suddenly stopped working was too awful. There was nothing to do but hope for the best.

As they say, hope is not a plan.

Today the stock market fell more than 1000 points on concerns that the coronavirus has so shut down the Chinese economy that many companies around the world will be unable to continue to supply consumers with products.  Tech companies led the way, among them Apple, whose stock lost 5% of its value in a single day amid reports that the release of its new iPhone will have to be delayed due to virus related production problems in China.

The impact of factory shutdowns in China is already showing up here in the ports of Los Angeles and Long Beach – two of the busiest ports in the United States.  Last year during the February – March timeframe there were a total of 17 cancellations of ship arrivals, largely due to the Lunar New Year.  So far this year there have been 37 such cancellations.

The Port of Long Beach has seen cancellations skyrocket as well.  In a typical year there may be 20 to 30 cancelled sailings.  Already this year there have been 50.  Noel Hacegaba, Deputy Executive Director of Administration and Operations at the port is crystal clear about the reason. It is, he said, “100% due to the factory closures” in China.

A ship docked at Long Beach on Friday of last week was the last one expected to come in from China for nine days.

Long Beach and Los Angeles are not exceptional.  Many Chinese ports remain effectively closed.  The number of cargo containers coming out of China each week has fallen by 300,000 since the virus hit.  Worldwide the cost of shipping cargo is plummeting as ship owners compete for a rapidly diminishing amount of trade.

U.S. firms are already experiencing significant delays in getting shipments from China, but they are fortunate in the overall scheme of things. Given the distances involved, American companies have yet to experience the full force of shutdowns, because products were already in transit when the virus hit with full force. For a glimpse of the future, though, we need only look at South Korea.

South Korea’s giant Hyundai complex at Ulsan, the world’s biggest auto assembly facility, recently shut down. The complex, which includes five separate automobile plants and makes 1.4 million vehicles a year is offline, because it cannot get the critical parts it needs from China. Twenty-five thousand workers have been laid-off. Hyundai is not the only firm affected. Other major car companies in South Korea are either shutting down, limiting operations or considering doing so.

Here’s the real bad news. It is likely only going to get worse. The Chinese Communist Party has no choice. A citizenry out of work, out of money and faced with the truth that its government cannot combat the growing epidemic may finally revolt. The coronavirus is not just threatening lives. It is threatening the very existence of the regime.

So, in desperation, the Chinese government is forcing factories open and herding hundreds of millions of workers, many of whom were locked down and in isolation, back into the crowded dormitories where they live during the work year, half a dozen men or women to a room, using communal bathrooms and working on overcrowded factory floors. There could not possibly be a better petri dish environment to guarantee a disease – already defying all efforts to control it – explodes.

We made our deal with the devil. Like Faust the price we pay will be a terrible one.

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